White Paper   Innovation in the Banking Sector                February 2012       1                Sink or Swim?          ...
White Paper                    Innovation in the Banking Sector                           February 2012             Table ...
White Paper            Innovation in the Banking Sector                February 2012             1.       INTRODUCTION    ...
White Paper            Innovation in the Banking Sector                February 2012             2.       EXECUTIVE SUMMAR...
White Paper           Innovation in the Banking Sector                February 2012                                3.    I...
White Paper            Innovation in the Banking Sector                February 2012                             corporate...
White Paper            Innovation in the Banking Sector                February 2012                                 as th...
White Paper            Innovation in the Banking Sector                February 2012                              Financia...
White Paper             Innovation in the Banking Sector                February 2012             their product portfolio,...
White Paper              Innovation in the Banking Sector                February 2012                             4.    I...
White Paper            Innovation in the Banking Sector                February 2012                             André Cic...
White Paper             Innovation in the Banking Sector                February 2012                                 corp...
White Paper              Innovation in the Banking Sector                February 2012                                Bank...
White Paper            Innovation in the Banking Sector                February 2012             office to enhance perform...
White Paper           Innovation in the Banking Sector                February 2012             Increasing fraudulent acti...
White Paper            Innovation in the Banking Sector                February 2012                                5.    ...
White Paper           Innovation in the Banking Sector                February 2012             has seen a gradual decline...
White Paper           Innovation in the Banking Sector                February 2012             It is vital that core busi...
White Paper              Innovation in the Banking Sector                February 2012             6.       CONCLUSION: KE...
White Paper            Innovation in the Banking Sector                February 2012                 •   To improve data m...
White Paper           Innovation in the Banking Sector                February 2012                                 ABOUT ...
White Paper           Innovation in the Banking Sector                February 2012               Factoring            Lev...
Upcoming SlideShare
Loading in …5

Swim or Sink: Essential Insights for Staying Afloat in the Banking Market Place


Published on

Results of a survey sponsored by SAP conducted by Pierre Audoin Conseil with global banks to highlight what innovations they are adopting to stay competitive and stay afloat.

Published in: Economy & Finance, Business
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Swim or Sink: Essential Insights for Staying Afloat in the Banking Market Place

  1. 1. White Paper Innovation in the Banking Sector February 2012 1 Sink or Swim? Essential Insights for Staying Afloat in the Banking Market Place. How innovation can help core business better adapt to the changing market February 2012© PAC 2012 www.pac-online.com
  2. 2. White Paper Innovation in the Banking Sector February 2012 Table of Contents 2 1.   Introduction .................................................................................. 3   2.   Executive Summary ..................................................................... 4   3.   Industry Analysis: Main challenges for the banking sector in 2012-2015 ...................................................................................... 5   4.   Innovation in Banks: examples of projects undertaken ........ 10   5.   “Emerging models” and new entrants: focus on the UK market ......................................................................................... 16   6.   Conclusion: key areas where IT technologies will help banks to better adapt to the changing environment ......................... 19   About SAP: How can our innovative charging and billing solution help your institution? ................................................. 21  © PAC 2012 www.pac-online.com
  3. 3. White Paper Innovation in the Banking Sector February 2012 1. INTRODUCTION 3 The global banking industry is going through a phase of significant change, as banks and financial institutions have come under intensifying pressure from regulators, customers and shareholders. These changes are a catalyst for them to address the inherent weaknesses exposed by the financial crisis. For far too long banks have relied on legacy processes and systems, and silo organisations that can no longer support the business effectively. For banks to survive and grow in the current economic climate, they must become more innovative. Innovation will be key to achieving significant cost efficiencies, enhancing differentiation, and will help to better support the business by more aggressively retaining and winning customers in an increasingly competitive market. Banks will have to adapt their current business models and this will significantly impact the way banks work today. Pierre Audoin Consultants (PAC) undertook a study sponsored by SAP to investigate how banks can innovate to improve their business and financial performance. As part of this study, PAC conducted a number of interviews with business decision makers from Strategy & Innovation, Marketing, Pricing and Finance departments as well as IT managers to get a comprehensive view on how various departments, processes and IT systems are being impacted by changing market dynamics. This White Paper highlights the key challenges banks are facing across the globe and identifies important areas that they should address to remain competitive in an ever-changing regulatory and competitive environment. This paper will cover the following areas: • Overview of the key challenges the banking sector is facing; • Practical examples of how traditional business models can be innovated; • Strategies deployed by successful new players in the UK market; • How IT can help the core financial business master the ever- changing market.© PAC 2012 www.pac-online.com
  4. 4. White Paper Innovation in the Banking Sector February 2012 2. EXECUTIVE SUMMARY 4 The banking sector has come under major public and regulatory scrutiny. Financial institutions are facing challenging times due to cost pressure, intensifying pressure from regulators, and increased competition alike. • Based on the current economic outlook, institutions need not only to improve cost management and margins, but also adjust their business models, improve their efficiency and deliver more value- added products and services across their core businesses; • Attrition, an ever present threat to many banks, forces financial institutions to rethink their customer service levels, improving trust and loyalty among their existing clientele; • Main focus will be on governance, risk, and compliance (GRC) along with improving risk management, capital and liquidity levels; • Institutions need to embrace new technologies, like cloud and mobile platforms as well as the Internet to address future business needs today, and capture the interest of a new generation of customers, clients and employees. More than ever, financial institutions need to create strong value propositions for their customers, both internal and external ones. Innovation, investment in new technologies, establishing new business models and new generations of products will be key elements to successfully manage the challenges at hand.© PAC 2012 www.pac-online.com
  5. 5. White Paper Innovation in the Banking Sector February 2012 3. INDUSTRY ANALYSIS: MAIN CHALLENGES FOR THE BANKING SECTOR IN 2012-2015 5 Since the financial crisis hit the global market, we have witnessed an acceleration of widely ignored market forces including changing consumer behaviour, regulatory and competitive changes, and the mainstream use ofRBS: “…given the economicoutlook and the difficult innovative technologies.trading environment, we are Now these changes, combined with a downgraded economic outlook, areactively working on furthercost initiatives across the putting profitable banking models and consequently Return on Equity (ROE)group….” under significant pressure. A highly competitive industry with demanding customers… In retail banking, demand is maturing and customers request higher levels of customer care, along with more personalised products and services. Banks are increasingly challenged to maintain existing customer relationships. The crisis has also negatively affected customersʼ perception of banks and has heightened awareness of the way in which they interact with the bank of their choice. Financial institutions around the globe recognize the need to deliver a more efficient and customer-centric set of products and services than ever before. Such strategies will help banks to reconnect with their customers, improve interaction and build customer loyalty. Many banks are increasingly seeing the need to compete not only on product portfolio, but superior service delivery, and value-based pricing. Relationship pricing is one example of how banks can build on existingRelationship-based pricing isincreasingly considered by customer relationships and the actual value these bring to the institution.banks as a way to reward This form of price differentiation by understanding the overall customercustomers for their loyalty, relationship and the consequent profitability each brings to the business,and help drive profitability enables banks to offer rates and charge fees more appropriately for alland wallet share. products and services provided to each customer segments. On the other hand, commercial retail customers are rewarded for their loyalty, as well as being presented with more personalised products and services. In the coming years, even greater competition is to be expected in servicing the corporate segment. As another result of the financial crisis, global financial institutions need to continuously adapt their organisations to focus even more on providing exceptional service to their existing retail and © PAC 2012 www.pac-online.com
  6. 6. White Paper Innovation in the Banking Sector February 2012 corporate customer base as a means to offset the declining revenues from investment banking activities. 6 Regulatory changes demand greater protection of consumers New regulatory requirements from the Basel III and Dodd-Frank accords on risk management demand greater transparency of capital and liquidity levels, and even more protection of consumers. In addition, regulations such as those derived from the European Payment Services Directive introduced in 2007 are forcing banks to develop a single consolidated view of their customers and clients, which is required for reporting purposes. The Financial Services Authority (FSA) in the UK has also forced UK banks to consolidate all of the accounts a depositor has with a bank to arrive at a single view of the customer. This is to enable a faster payout of funds in the event of a bank failing.Regulatory changes across In addition, regulators are also enforcing wider changes to be made in thethe globe require banks to banking industry to prevent another financial crisis. Such changes will havecreate single analytical a significant impact on banking processes and operating costs. In the UK, forviews of their clients. example, the Vickers Commission recommended, in September 2011, “fundamental and far-reaching” reforms forcing banks to increase their capital and separate their core retail operations from their riskier trading and investment banking businesses. It calls for a bank’s “ring-fenced” operation to have a separate board of directors and in addition, to maintain equity capital equivalent to 10 per cent of their respective risk-weighted assets. Another example is the US, where bank regulations resulting from the Dodd- Frank Act, intended to protect consumers, are increasing pressure on banks cost structures to comply with these new rules and even more so should they fail to comply… The act includes an amendment that limits fees on payments, as well as a requirement to move many over the counter (OTC) businesses to clearing houses and to divest proprietary activities. The main issue for banks will not only present itself in reviewing their existing revenue streams, prevent potential leakage (i.e. fee waivers, exception pricing) but to find new revenue streams with innovative products and services. New technologies: critical need to develop Internet and mobile channels New consumer behaviour has been forcing banks to develop and enhance technical capabilities to service their customers through new channels such © PAC 2012 www.pac-online.com
  7. 7. White Paper Innovation in the Banking Sector February 2012 as the Internet and more recently mobile devices. The Internet is now part of everyday life in almost every country: a recent survey carried out by the European Commission highlighted that nearly 60% of Internet users in the 7 27 European Union countries shopped online in 2010; the proportion of e- shoppers among Internet users ranging from 9% in Romania to 79% in the United Kingdom (a mature market). The same survey showed that nearly 40% of individuals used Internet banking services: from 2% in Bulgaria to 83% in Norway. The Internet is also driving the marketʼs expectations to new levels: customers and clients are becoming increasingly sophisticated in their demands and expect a consistent service across the multiple banking channels they use. In addition, customers expect not only a faster response from their banks but many have now the capacity to ʼshop aroundʼ and compare products and services offered among different financial institutions increasing the overall transparency in the market. Beyond the Internet there have been significant advances in technologiesEvolving market expectations:Customers and clients driven mainly by the IT community, the increased need for convenience andincreasingly require real-time security among customers; with not only IT companies but also financialquotation. organisations to keep pace with emerging consumer and IT trends to remain interesting and subsequently competitive in the market. While some banks more than others have adapted quickly to the rapid changes in the market place, many have not yet made major investments; yet all need to start or keep such momentum going. The fact that many financial institutions are working with home-grown applications with little room for flexibility and scalability is in itself a challenge. Providing a seamless cross-channel experience is becoming an important component in customer retention. Generation Y customers and businesses expect mobile access to their banking services through tablets and smart phones. In this hyper-connected world, innovative ways of interacting with customers are emerging such as electronic or virtual wallets with a pre-paid account balance, which can be topped up directly from a userʼs bank account and debited in real-time to pay for goods and services. Pre-paid accounts such as e-wallets also reduce the number of transactions to process. Smart mobiles can make contactless payments using on-device charging and balance management capabilities embedded in a smart card on the phone. Smart cards open up opportunities for personalised offers to be made for online and offline services and for third parties to offer coupons and real-time offers at the point of sale. © PAC 2012 www.pac-online.com
  8. 8. White Paper Innovation in the Banking Sector February 2012 Financial institutions have an opportunity to join forces with third parties to capture additional revenue streams that might otherwise elude them such as offering mobile rate plans. Sophisticated partner revenue management 8 calculation and settlement mechanisms are necessary for a seamless, close looped payment process. Pressure from new entrants In the last decade, a number of countries have undergone deregulation to battle with the high concentration of institutions within the financial services sector. The concentration of the banking industry is particularly high in continental Europe, where the leading five banks (BNP Paribas, Deutsche Bank, Royal Bank of Scotland, HSBC and Barclays) own 70% to 80% of the overall market. Deregulation coupled with the development of e-business has given way to increasing competition from payment institutions. These new entrants mostly focus on products and services around InternetIn their race to offer the“best service”, banks ought and mobile payments, and tend to come from the telecoms or Internetto be cautious not to be industries. Companies such as PayPal, TNS, Google, or Buyster (JVsqueezed out of the between three major operators in France) see significant revenue-generatinglucrative internet-based opportunities in the banking sector through offering services like creditcredit transfer market. transfer and/or direct debit services. Offering these services provides them with an entrance to banking services. In their race to offer the “best service”, banks ought to be cautious not to be squeezed out of this market, which presents income-generating opportunities around fee-based pricing. Need to improve cost management and to rethink business models All the above-mentioned market forces, together with the current economic climate, put traditional banking models under significant pressure. Banks need to improve cash management and transparency of their financial position, to put a greater focus on high-value customers, to rationalise costs, and to deliver more value across the organisation. However, financial institutions are faced with the challenge to keep costs to a minimum through setting efficiency targets, while attempting to meet higher customer expectations. In doing so, banks are reluctant to generate an overwhelming number of products that can lead to unclear credit scoring. Some banks are working on simplifying and enhancing the transparency of © PAC 2012 www.pac-online.com
  9. 9. White Paper Innovation in the Banking Sector February 2012 their product portfolio, reducing the number of products delivered per branch, which can go up to hundreds in some extreme cases. 9 Banks need to develop customer centric approaches Investment Banking: need for improved control over margins and sales activity Investment banks have been significantly hit by the credit crisis in the late 2000ʼs, with large institutions such as Bear Stearns and Lehman Brothers collapsing, and other banks being acquired by rivals. In addition, a number of banks around the world have been nationalised, due to being bailed out by their respective governments such as the Royal Bank of Scotland, 82% nationalized in 2009. Investment banks have to deal with two major pain points: they need to implement new risk requirements, and develop new offers relating to the implementation of Basel III, MIFID II or the Dodd-Franck act in the US. In addition, investment banks are facing similar issues to the rest of the industry: the need to improve productivity, to deploy automated processes and to improve risk management.© PAC 2012 www.pac-online.com
  10. 10. White Paper Innovation in the Banking Sector February 2012 4. INNOVATION IN BANKS: EXAMPLES OF PROJECTS UNDERTAKEN 10 How do banks react in view of these challenges? How do they innovate? Research shows that in most cases innovation involves smart use of IT and strategic investments. New generations of products and services are designed to reconnect with customers and clients, improve customer analytics, consolidate a view of the customer across the enterprise, develop new channels, and meet market expectations. This section provides insight into the practical solutions that are developed by proactive players. New offers and renewed focus on customer-centric approaches: towards new product delivery architectures in the retail business In order to meet customersʼ expectations for a more targeted offering, banks are forced to re-examine their existing sets of products and services. To do so they will use different approaches: diversify in new segments such as real estate or insurance, propose bundled offers with airline partners, develop new online services, and mobile banking. Banks have also recently announced products and services that integrate social networking platforms. Commonwealth Bank of Australia launched CommBank Kaching in October 2011, which includes facilities for retail customers to make peer-to-peer payments through their Facebook accounts. Some retail banks have integrated Twitter into their iPad application for customer service. In a similar fashion, Citi Paymentsʼ Facebook application allows mobile operators to take top-up payments from customers via Facebook. Emergence of a middle office connecting the delivery chainA “new architecture is To be able to offer online services and retain or attract customers, banksbeing shaped” in which need to have the right applications in place in their back-offices to supportsmart tools connecting the bundling of services, personalised offers and relationship based pricing. “Aoverall delivery chain andthe great amount of data new ʻdelivery architectureʼ is being shaped in retail banking: we expect aavailable play a key role. change in traditional go-to-market approaches in the coming years”, notes © PAC 2012 www.pac-online.com
  11. 11. White Paper Innovation in the Banking Sector February 2012 André Cichowlas, Head of Financial Business Unit at Capgemini. “We predict the established front- and back-offices will evolve to include a ʻmiddle-officeʼ”. This middle office will be made of smart tools connecting the 11 overall delivery chain. Its purpose will be to centralise and make best use of available customer data, rationalise and clarify the portfolio of products offered to customers according to pre-defined rules, assist front and back- offices in simulating the best path of action for the organisation, etc. The pricing and scoring rules, pre-defined by the organisation, will allow this middle office to suggest the “next best actions” to take. These “next best actions” will suggest the best products to offer in view of credit scoring rules, the best invoicing mechanisms, or channel priorities. This new architecture constitutes an effective method of personalised pricing. “Pro-active players have initiated reengineering of delivery channels and processes, using BPM (business process management)”, concludes André Cichowlas. Leveraging analytics for improved segmentation More than ever, a better understanding of clientsʼ needs and of customerBanks are working onimproving the usage of the segmentation is required. In order to identify high-value clients and tailorlarge amount of customer offers to their needs, banks are investing in tools and facilities that can helpinformation available. improve customer profiling and analytics. Banks are working on improving leverage of the large volumes of customer data to better understand their customers. Through the use of analytics, banks can enhance customer segmentation and anticipate customer requirements. Knowing the customer will enable banks to put together more tailored products, and identify cross-selling opportunities. A new generation of offers: an example from corporate banking Corporate clients expect their financial partners to help them improve cash management in a global context. Many of the banks are focusing on expanding their cash management products and services to enable © PAC 2012 www.pac-online.com
  12. 12. White Paper Innovation in the Banking Sector February 2012 corporate clients to optimise their working capital, and to set up international cash pooling facilities, payment or factoring facilities. In doing so, banks sometimes find it difficult to fund the level of investment 12 required to succeed in the cash management business. A financial institution interviewed in the study, provides a good illustration of how focused IT investments can help determine the required financial equation to launch specific offers which address a market need. This major player introduced a reverse factoring platform to meet the needs of some important corporate clients that have been long-term customers. These clients were requesting financial services that would help them improve cash management and support a network of smaller suppliers in the current challenging economic climate. Reverse factoring is a process that enables a purchaser (usually a major company with high credit scoring) to initiate a factoring process to help their network of suppliers to finance their receivables more easily. The financial equation is sometimes difficult to achieve in reverse factoring,Electronic platforms includingbest of breed analytical and and it can be challenging to reach the required level of profitability, partlyinvoicing tools enabled because of the higher administration and invoicing costs incurred.improvement of both top and The financial institution interviewed created an electronic process platform tobottom lines of the newoffering. address these constraints. This platform included several best of breed analytical and invoicing tools and helped enhance efficiency through the automation of the payment and collection processes, while reducing costs and speeding up the process. The bank has reaped a number of benefits as a result of implementing the electronic process platform. These include: satisfying large account requirements, acquiring new clients (suppliers), diminishing activity ratios and average collection time on these offers. Internet banking as a core line of business… BNP Paribas adopts an innovative approach to online banking For some time, Internet banking was perceived as an opportunity to improve customer satisfaction and to facilitate economies of scale across the organisation. However, in most initiatives, Internet banking was treated as a separate channel. In the aftermath of the “brick vs. click” era, the Internet channel was viewed as a multimedia platform and as the main alternative to the branch network. © PAC 2012 www.pac-online.com
  13. 13. White Paper Innovation in the Banking Sector February 2012 Banks undertook massive investments in building efficient but remote e- banking channels. The approach was then to set up the channel, … and expect the back-office to consequently adapt. 13 The approach soon revealed some shortcomings: each channel tended to be stuck in its own logic, if not in opposition to other channels. In order to avoid these shortcomings, BNP Paribas Online Banking decided to develop its own approach to online banking. BNP Paribas Online Banking was born from an acceleration programme three years ago. It now employs 1,000 people and manages 2.4 million clients. 9% of savings accounts of BNP Paribas France are now signed up online, 80% of personal stock trades are placed through the Internet. Created as a start-up within the retail bank, the organisation wants to position itself as enabling the transition from a traditional bank to the bank of tomorrow. Virginie Fauvel, Head of BNP Paribas Online Banking explains: “We wanted to address the new ways of banking, not be an isolated channel. This is BNP Paribasʼ specific approach to Internet and mobile banking. Beyond, ʻmulti- channelʼ we want to directly integrate Internet and mobile banking into the established bank. For us, Internet is a core business line with all the departments any other line of business would have: technology, of course, but also marketing, back-office, customer services …” This is a pioneering approach in the online landscape. Now that the offers are designed (in November 2011, BNP Paribas launched its mobile banking services, setting the e-wallet), the challenges for the years ahead are: to improve analytics, to improve sharing of data between the departments, and to further develop the online business.Innovative cross-channel The innovative “cross-channel” approaches, such as the one deployed byapproaches: all business BNP Paribas, can be defined as the next step where all channelslines communicate communicate collaboratively between each other, supported by the samecollaboratively, supported bythe same level of customer level of customer information, and enabling clients to move from one channelinformation. to the other with a consistent experience. Back office is key ... Launching new services also provides the opportunity to create lean processes and to automate some of the interactions between front and back- © PAC 2012 www.pac-online.com
  14. 14. White Paper Innovation in the Banking Sector February 2012 office to enhance performance and drive out operational costs, enterprise wide. The opportunities to improve processes, and therefore cost management, 14 are manifold: introduction of new services (such as reverse factoring), introduction of new Internet and mobile “channels”, or as a result of an important M&A activity. Leveraging lean processes enables streamlining, consolidating, identification of synergies, and overall helps support efforts towards building new business models. The benefits that can potentially be achieved are: • Improve control over costs and quality management, enabling a reduction in the number of errors and mitigate operational risks; • Economies of scale at all levels: equipment (printing, etc.) and immaterial (e.g. time); • Reduce time-to-market when implementing new products and processes; • Benefit from of a 360° view of the customer and increased customer focus. Financial Agency (FINA), the leading Croatian clearing house in financial mediation and in application of information technologies, recently launched a service line targeted at businesses and citizens that encourages electronic billing and addresses the imperative need for organizations and banks to automate and standardise internal billing processes. FINA expects its clients to benefit from improved margins thanks to reengineering their processes. Investment banking Investment banks are currently working on enhancing back-office automation, an area that had been neglected in the years prior to the financial crisis. Last year the US Securities and Exchange Commission, an important institution, approved the use of a type of SWIFT message in trade confirmations, helping to eliminate errors in the confirmation process. Where new products are launched (such as the recently created Exchange Traded Funds), banks are usually more focused on making sure the product gains traction in the market and the banking operations behind are run more efficiently.© PAC 2012 www.pac-online.com
  15. 15. White Paper Innovation in the Banking Sector February 2012 Increasing fraudulent activity and rogue trading in recent years have also forced banks to reassess their internal processes. For example, in 2008, Société Générale uncovered a $3.7bn fraud by a rogue trader, and more 15 recently, in 2011, UBS announced that it had lost $2.3bn due to unauthorized trading performed by a director of the banks Global Synthetic Equities Trading team. Banks increasingly recognize the need to protect the investment activity from external and internal attacks and to reassess their governance, risk and compliance processes, among other things. In periods of increased volatility, investment banks are looking for smart software that can cope with complex and changing fee structures.© PAC 2012 www.pac-online.com
  16. 16. White Paper Innovation in the Banking Sector February 2012 5. “EMERGING MODELS” AND NEW ENTRANTS: FOCUS ON THE UK MARKET 16 Opportunities for new banking players due to decreasing customer loyalty In mature markets such as the UK and the US, financial institutions have“New banks” are entering the made some major investments in order to improve credit risk. However,market as regulatory despite this, banks were unable to shield themselves from the credit crisischanges and reducedcustomer loyalty lower that led to an all-time low in customer loyalty. Poor customer service levelsbarriers to entry… have added to the negative image of the established banks. This has opened up opportunities for new banks (foreign institutions or non-traditional organisations such as retailers) to enter local markets, which have previously presented high barriers to entry due to lack of competition and high levels of customer loyalty. The current negative perception of traditional banks has made customers more receptive to new banking institutions, which are articulating a clear and strong message around their intentions to provide high levels of customer service. For example, in the UK, Metro Bank, a US bank and completely new entrantMetro Bank has around35,000 customers in the UK, to the UK retail market, Tesco Bank and Virgin Money have been investing15,000 ahead of target (Q4 significantly in expanding their retail banking business. Metro Bank aims to2011), since its UK launch in open 200 branches by 2020, while Tesco bank seeks to open in-store2010. branches across its supermarket chain with the aim to launch its current account offering in 2013. More recently, in November 2011, Virgin Money successfully acquired government bailed-out bank Northern Rock, and has since launched Virgin Savings Accounts. Virgin Money has over one million customers worldwide. Adopting innovation to address challenges faced by established banksRevenue leakage:Banks are losing revenue To build competitive advantage in the market, these new banks are focusingthrough transactions and ad- on building trust and differentiating themselves by providing high levels ofhoc services that are not customer service. New banks in the UK are placing significant efforts inbeing billed. building customer relationships through investing in branches and coffee lounges to encourage more face-to-face interaction. The UK, for example, © PAC 2012 www.pac-online.com
  17. 17. White Paper Innovation in the Banking Sector February 2012 has seen a gradual decline in branches as the established banks look to cut costs and take advantage of the rising popularity of online-banking. Faster time to market is also an area of investment, and identified as a key 17 differentiator, by the new banks. While established banks have invested efforts into delivering new product offerings more rapidly, these efforts have focused on simply launching new products to the market, and have neglected other areas of customer service, e.g. customer on-boarding, dealing with customer complaints, service-to-cash. For example, Metro Bank has made a promise to customers that they can set up a new account, apply for new services and make use of their services in less than 15 minutes. Fast time to market and offering a consistent and high level of service across multiple channels are areas that a number of established banks around the world have failed to meet satisfactorily. This is partly due to the on-going battle with home-grown and legacy systems that are no longer able to keep pace with changing business and market requirements. Legacy systems need to be overhauled for banks to not only compete better in the market, but also to enhance internal efficiencies. Revenue leakage is a key example where banks lose vast amounts of money, through transactions and ad-hoc services that are not being billed due to operational inefficiencies, inadequate pricing solutions and lack of automation. Legacy systems that do not communicate with one another add to the woes. To prevent revenue leakage, banks need to be able to price products and services accurately, and bill them accordingly throughout the entire customer relationship, in a seamless and automated manner. Increased competition from new entrants is forcing established banks to re- examine their strategies. Banks are going back to basics, and in a number of cases are overhauling their IT systems to put in place more flexible technologies that can respond faster to changing market dynamics. Leveraging technologies to enable business change is crucial IT is a critical component in the delivery of customer service. In order to successfully execute the business strategy and enable business innovation, new banking entrants are turning to external IT suppliers for support. These banks understand the need to focus on their core business, and leave IT to specialised vendors. New banking entrants are in a position to learn from the established institutions that have found themselves battling with complicated and cost-intensive legacy systems.© PAC 2012 www.pac-online.com
  18. 18. White Paper Innovation in the Banking Sector February 2012 It is vital that core business processes such as customer on-boarding, sign- up for add-on products, approving a loan and service-to-cash are optimised to provide a seamless end-to-end service. Lack of automation can lead to 18 great inefficiencies, unbilled services and impact service levels and time to market. Automation alone is not enough, however, as the service-to-cash process of a bank for example also requires the connection to various institutions such as corporate customers and data providers. Metro Bank in the UK is an example of one bank that has fully embraced IT, and has been working extensively with external IT suppliers. Today, the bank has eight technology staff and maintains minimum IT in-house. A lot of its technology has been outsourced, and software licenses have been purchased from third-party providers.© PAC 2012 www.pac-online.com
  19. 19. White Paper Innovation in the Banking Sector February 2012 6. CONCLUSION: KEY AREAS WHERE IT TECHNOLOGIES WILL HELP BANKS TO BETTER 19 ADAPT TO THE CHANGING ENVIRONMENT In order to respond to the dynamic environment, banks will have to use IT in order to deal with an exponential increase in customer data, to optimize back-office processes and address increasingly complex business rules. The research carried out by PAC revealed that practitioners are focusing on the following key technology criteria to help meet business requirements: • Capacity to handle high volumes of data that is increasing at an exponential rate; • Relationship-based pricing and real-time services capabilities; • Ability to deal with complex business rules set by the core business; • Powerful search engine that facilitates data capture and sharing of information; • Standardization to enable a seamless end-to-end process with a greater focus on customer; • Sophisticated tools that allow integration of data across the enterprise, to reach a single and accurate view of the customer; • Solutions that help support localisation of banking subsidiaries and to enhance control between these businesses and their headquarters, in a secure environment; • Tools which handle multi-channels, multi-currencies, and multi- entities capabilities. The research further identified key areas of investment in the next 12 to 18 months: • Technical development and formation of partnerships to ensure visibility on all mobile devices (e.g. smartphones, tablets) to deliver banking services; • Security, defined as 0 hacking; • Automation of back-offices and branches to improve relationship between front- and back-offices; • Empowerment of business users (marketing/ account managers, etc.) to enable them to manage relationship via application software and tools;© PAC 2012 www.pac-online.com
  20. 20. White Paper Innovation in the Banking Sector February 2012 • To improve data management, data capture, and data mining. The purpose is to leverage data to analyse customer segments and propose tailored service bundles; 20 • Improvement of real-time analytics to help customers understand their charges better. The banking landscape is undergoing major changes as the challenges outlined above constrain banks to adopt new business models. Regulations such as the ring-fencing between the retail and investment banking activities in the UK are a key example of how significant some of these changes will be - impacting business infrastructure, processes and systems. Consumerization, innovation and emerging technology trends, such as mobile banking, are leading to increasing alignment between business and IT. The market is witnessing a greater involvement of the core business in the IT decision-making process since they understand the strategic impact of IT to their daily tasks and in executing the business strategy. Moreover, staff from the line of business increasingly perceives IT as a key investment to enable innovation. Banks are innovating their business models and channels to differentiate their services in the market, in a number of different ways, including creating customer-centric processes, optimizing back-office processes and implementing increasingly complex business rules. Financial institutions whose channels-to-market do not include mobile services and whose legacy infrastructure is unwieldy and inflexible should do some serious soul-searching on renovating their applications and revamping their business models to ensure their survival beyond 2015.© PAC 2012 www.pac-online.com
  21. 21. White Paper Innovation in the Banking Sector February 2012 ABOUT SAP: HOW CAN OUR INNOVATIVE CHARGING AND BILLING SOLUTION HELP YOUR INSTITUTION? 21 A Modular Best-of-Breed solution to support the service to cash business process SAP offers the next generation end-to-end solution to streamline your complex and challenging business needs. Our innovative convergent charging and billing software consists of three main components: convergent charging, convergent billing and customer financial management which integrate seamlessly with SAP CRM or any other 3rd party solution you may have deployed. Combined, these applications form a sophisticated end-to- end platform, enabling financial institutions to efficiently manage payments, collections and accounting – optimizing financial care for large volumes of customers and transactions. The modular next-generation billing platform for the service to cash process allows companies to manage complex revenue sharing with both up and downstream partners while deploying elements within existing IT software landscapes – adding value where it is needed most and providing companies with the reliability and efficiency they need to manage billing and real-time payments across a diverse matrix scenario. Business Description Applications Real-time price Benefit from sophisticated pricing simulation and quotations personalized offer management to generate targeted quotations in real-time for business and individual customers. Relationship Differentiate your services and apply insights into based pricing your customer segmentation to charge customers based on their relationship with you and essential value/ profitability to your bank. Consolidated Use a modular and easy to integrate solution to billing produce a single consolidated bill for business and individual customers and ensure that all fee revenue is collected.© PAC 2012 www.pac-online.com
  22. 22. White Paper Innovation in the Banking Sector February 2012 Factoring Leverage flexible revenue calculation and collection capabilities to manage accounts receivables for business customers on their behalf. Support 22 international transactions in multi-currencies. Scale to handle the volume of transactions with confidence. Clearing Houses Post trade compensation. Apply sophisticated and Exchanges business rules and volume-related discounts to compensate all parties seamlessly including brokers. Mobile payments Electronic or virtual wallets can be set up in any currency and the balance can be credited or debited in real-time. Offline and online charging can be accomplished in a contactless fashion thanks to on- device charging capabilities. Credit Simplify, streamline, manage your complex charging bureaus/agencies and billing models for your corporate and retail customers alike. High Volume For card issuing banks: process high volumes of Credit Card credit card transactions. For credit card companies: Transactions manage respective complex charges and fee models for each issuing bank and merchants that use their payment processing systems. About SAP: As market leader in enterprise application software, SAP (NYSE: SAP) helps companies of all sizes and industries run better. From back office to boardroom, warehouse to storefront, desktop to mobile device - SAP empowers people and organizations to work together more efficiently and use business insight more effectively to stay ahead of the competition. SAP applications and services enable more than 176,000 customers (includes customers from the acquisition of Sybase) to operate profitably, adapt continuously, and grow sustainably. For more information, visit http://www.sap.com/solutions/business- process/next-generation-billing/index.epx Twitter: @SAP_Banking, @SAP_NextGenBill© PAC 2012 www.pac-online.com